Commercial property is a great investment. It comes at a higher cost than investing in residential properties, but the return is also much higher. When considering whether the investment in commercial property would be worth it, understanding the different property valuation methods and their cost could help you make an informed decision.
There are 5 methods used to value commercial property, which are:
- Comparative Sales Method
- Hypothetical Development
- Income Capitalisation
- Replacement Cost
- Summation
The method used is a large factor in the cost of a commercial property valuation in Melbourne.
The 5 Commercial Property Valuation Methods
Comparable Sales Method:
The comparable sales method is one of the most popular methods of conducting a property valuation. It is commonly referred to as the “Direct Comparison Approach”. This method involves a valuer finding suitable comparable properties. For a property to be considered a suitable comparable, it must be similar in:
- Size
- Shape
- Location
- Age
- Features
- Zoning
Among many other things. Once commercial property valuers find these properties, they examine their market data. This could be the comparable property’s current market value or its recent sales price. Commercial properties can vary greatly, which makes finding a good number of comparable properties more difficult. Depending on the variety of properties in your local commercial property market, this may not be the most reliable method for a commercial property appraisal.
Hypothetical Development:
Hypothetical development is a method used to determine the value of land based on its potential for future
development. Its focus is not on any existing structures or buildings. Any structures on these lands are normally of
insignificant value leading the current owner or potential owners to have more interest in the land’s value. A valuer
may include the costs of demolishing these structures when calculating the site’s hypothetical development value.
The ultimate goal of this method of commercial valuation is to determine whether any development on the site is both feasible and worth the cost. If developers, lenders, or investors are unsatisfied with the hypothetical development value of the property then they will look elsewhere to develop their commercial property.
Income Capitalisation:
Also known as the “Income Approach” or “Direct Capitalisation”, the income capitalisation approach
is a commercial real estate valuation method that calculates an estimate of the income the property
may be able to generate. This income capitalisation approach will provide an estimation of the property’s income for
one financial year.
Commercial properties will often generate more income for its owner than residential properties. An owner invests in
commercial property with its greater income potential in mind, thus making this an attractive approach when
conducting a valuation for a commercial property. After all, for investors, the amount of income a
property can generate is the most important factor of its value.
The income capitalisation formula to calculate a commercial property’s value is:
Property Value = Net Income/Capitalisation Rate
Replacement Cost:
This commercial property valuation is conducted for insurance purposes. A commercial valuer will
calculate the total cost of replacing the building/structure. This calculation is given to your insurance provider to
ensure your policy covers all costs should a destructive event occur.
When calculating the replacement cost of your commercial property, the valuer must consider many factors. Replacement cost factors include:
- Rates and costs for labour and materials
- Services fees for professional consultants such as architects, designers or engineers
- Council rates, regulations and restrictions that may affect the development
- The size of the building
- Material the building is made of and whether the same material or contemporary equivalent is available
These factors among others are researched, examined and analysed by the valuer to determine the commercial property replacement cost.
Summation:
The summation method of property valuation may also be referred to as the “cost approach”. For commercial
properties, the summation method is the total sum of the value of the property’s
- Structure and/or units
- Size
- Land improvements
- Location
- Future development potential
- And everything else that increases or reduces the property value.
This form of property valuation focuses on the individual attributes and characteristics that form the property. The summation method can be combined with other commercial property valuation methods such as the comparison approach and replacement cost.
How Much Does a Commercial Property Valuation Cost?
The cost of a commercial property valuation is be determined by three factors:
- The size of the property and its type
- Its location
- And the intended purpose of the valuation
Once provided with this information, commercial valuers can generate a quote. With the location of the property, travel time will also be a consideration in the valuation cost. Especially, if the property is far from the Melbourne metropolitan area.
The intended purpose of the commercial property valuation determines its method, the time required, the format of the commercial property valuation report and its detail. All of this contributes to its cost. There are many different commercial valuation services that may require a specific type of valuer. If a client is after a plant & equipment valuation, this will require a specialist with the expertise to value all sorts of assets, equipment, and machinery.
To receive a quote for a commercial property valuation, reach out to one of our Melbourne commercial property valuers via our contact us form - or call (03) 9020 1494.